Ch8supp - Introduction CCA calculation JHT Kim February 11,...

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Unformatted text preview: Introduction CCA calculation JHT Kim February 11, 2009 1/11 Introduction Measuring CF on an incremental basis Depreciation Motivation To evaluate a project, we compute PV: PV ( Proj ) = X t =1 CF j v t Determining CF t for each time t requires care. Some natural questions include: Can we use the estimated accounting incomes from the project as CF in the formula? Should we include the R&D cost that has already been spent for the project? What if the new project hurts the sale of existing product? 2/11 Introduction Measuring CF on an incremental basis Depreciation Incremental Cash Flows Matter 1 Cash flows matter, not accounting earnings (e.g., need to exclude depreciation) 2 Ignore sunk costs (i.e., if the cost has already been incurred, exclude it) 3 Incremental cash flows matter. 4 Opportunity costs matter. NPV > 0 should not guarantee automatic acceptance, particularly if you have to forgo another project with a higher NPV. 5 Side effects like erosion and synergy matter. If new product hurts existing product sales, we should recognize that fact 6 Taxes matter: we want incremental after-tax cash flows. 7 Inflation matters. 3/11 Introduction Measuring CF on an incremental basis Depreciation Estimating Cash Flows How to convert accounting numbers and to actual cash flows?...
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This note was uploaded on 06/11/2011 for the course ACTSC 371 taught by Professor Wood during the Spring '08 term at Waterloo.

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Ch8supp - Introduction CCA calculation JHT Kim February 11,...

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